What is the Cost of Goods Purchased?

The cost of goods purchased represents the total acquisition cost of merchandise bought for resale, net of purchase returns, allowances, and discounts. It may include freight-in, import duties, and other costs necessary to bring the goods to a saleable condition. This amount is used in calculating cost of goods sold, along with beginning and ending inventory. Accurate measurement is important because errors directly affect gross margin, inventory valuation, taxable income, and financial statement reliability for both internal reporting and external users.

How to Calculate the Cost of Goods Purchased

The calculation for the cost of goods purchased is to add freight in to the initial purchase cost and then subtract purchase allowances, purchase discounts, and purchase returns. The formula is as follows:

Initial purchase cost + Freight in - Purchase allowances - Purchase discounts - Purchase returns

= Cost of goods purchased

The following definitions apply to the preceding calculation:

Freight in. The transportation cost incurred to bring goods to your warehouse or store.
Purchase allowance. A reduction in the list price offered by a manufacturer or distributor, in exchange for ordering a minimum quantity.
Purchase discount. Reductions in price for early payment or bulk purchasing.
Purchase return. When a buyer sends goods back to the seller in exchange for a refund.

With this information, you can then add a markup percentage to arrive at the price at which goods will be offered for sale.

Example of the Cost of Goods Purchased

Medium Widget Company acquires 1,000 widgets for resale, at a cost of $1,000. It also incurs $50 in freight-in costs to acquire the widgets, and takes a 10% purchase discount on the purchase price. This results in the following calculation of its cost of goods purchased:

$1,000 Initial purchase cost + $50 freight in - $100 Purchase discount = $950 Cost of goods purchased